How low can stocks go? Updated risks and values – March 31st

How low can stocks go? Updated risks and values – March 31st

Bottom Line: The purpose of this story is to inform you as to what's possible in a near worst-case outcome for the financial markets. The reason is to understand what's possible, though unlikely, so you can plan soundly for your financial future unemotionally. The US stock market is the greatest wealth creation machine in the history of the world. I want you to benefit from it without making emotional mistakes with money.                  

Too often when we have a rare short-term downturn in the markets - it's too late to offer up information that might have been helpful ahead of time. This week's edition of "how low can stocks go" goes as the Dow, S&P 500 & Nasdaq stand against their all-time high levels:                           

  • DOW: 24% off record high
  • S&P 500: 23% off record high
  • Nasdaq: 21% off record high

We’ve had a feverish rally over the past week with the market up over 10% from the recent lows. April brings with it earnings season and I wouldn’t count out a retesting of the lows once the extent of the damage to American businesses is disclosed. Not to mention the most important info of all in the bigger picture... When and where does this story end? None of us know and that’s most problematic of all. It’s a lock that we’re in the early stages of a recession right now and we need to be braced for a brutal second quarter but then what? 

Year to date...

  • The Dow is down 22%, the S&P 500 down 19% & the Nasdaq is down 13%

If only market fundamentals mattered here's what we'd want to consider regarding the S&P 500 for example.                           

  • S&P 500 P\E: 19.76
  • S&P 500 avg. P\E: 15.78

The downside risk is 20% based on earnings multiples right now from current levels. That's 12% less risk compared with this time last year however it’s 14% more than just a week ago. Fundamentals on trailing earnings will deteriorate. The market is priced as though they’ll only drop by about 12% this year. That might be a bit optimistic. We’re close to the fourth “near worst case” event to play out with stocks since 1900. I’d prepare for the additional 20% drop at this point with a further reevaluation as earnings begin in April to see what deterioration looks like. It’s hard with no visibility. 

It's always important to ensure that you're positioned for negative adversity. If another 20% decline with the potential for more based on earnings season on the horizon wouldn't affect your day-to-day life, you're likely well positioned. If not, you should probably seek professional assistance in crafting your plan that balances your short-term needs with long term objectives.

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